CMP: Rs. 616.00; Market Cap:
Rs. 7,842.36 Cr; 52 Week High/Low: Rs. 607 / Rs. 360.60.
Total Shares: 12,73,11,106 shares;
Promoters : 33,77,333 shares –2.65 %; Total Public holding : 12,39,33,773
shares – 97.34 %; Book Value: Rs. 82.27; Face
Value: Rs. 10.00; EPS: Rs. 20.35; Dividend: 00.00 %; P/E: 30.27 times; Ind. P/E: 25.00;
EV/EBITDA: 12.53 times.
Total Debt: Rs. 3,279.84 Cr; Enterprise Value: Rs. 9,684.74 Cr.
SKS MICROFINANCE LTD: SKS Microfinance Limited
was incorporated in 1997 and is based in Andra Pradesh,
India. SKS Micro is a non-banking financial company – micro finance
institution, provides micro finance services to women in the rural areas in
India who are enrolled as members and organized as joint liability groups. It
offers income generation and mid-term loans to self-employed women to support
their business enterprises, such as raising livestock, running local retail
shops, tailoring, and other assorted trades and services. The company also
provides mobile loans for financing mobile phones and telephone services;
housing loans for the construction of new houses, or improvement and extension
of existing houses; and gold loans secured by gold jewellry to meet short term
liquidity requirements. In addition, it provides life insurance products. The company came with an IPO on July 28, 2010 with
issue of 1,67,91,579 equity shares of Rs. 10 each issued at Rs. 985 per share
raising Rs. 1653.97 Cr. A discount of
Rs. 50 per share on Issue Price of Rs. 985 was given to Retail Individuals
making their issue at Rs. 935 per share. The object of the issue was to meet
future capital requirements arising out of growth in business and to achieve
the benefits of listing on the Stock Exchanges. The shares got listed on August
16, 2010 at Rs. 1,040.00 making an intraday high of Rs. 1,162.00 and intraday
low of Rs. 1,040.00. SKS Microfinance is among the Largest microfinance
companies in India with presence across 16 states covering 1,00,000 villages.
SKS distributes small loans that begin at Rs. 2,000 to Rs. 12,000 (about $30-$180)
to poor women so they can start and expand simple businesses and increase their
incomes. The
Company’s products are categorized into proprietary products and distributor
products which include; Income Generation Loans (IGL) – Aarambh, Mid-Term Loan
(MTL) – Vriddhi, Long Term Loan (LTL), Solar Loan, Mobile Loans, Housing Loans,
Swarna - pushpam Gold Loan, and Life Insurance. SKS Microfinance Ltd is locally compared with L& T Finance Holding
ltd, Sahara Housingfinance ltd, IIFL Holdings Ltd, Shalibhadra Finance Ltd,
Rajath Finance Ltd, Indiabulls Housing finance ltd, Vardhman Holdings Limited,
SRG Securities Finance ltd, Equitas Holdings ltd, Ujjivan Financial ltd, Capital First Ltd, IFCI Ltd.
Investment Rationale:
SKS
Microfinance was incorporated in 1997, it was named as "Swayam Krishi Sangham" or SKS. SKS Microfinance Ltd is the largest MFI
in India in terms of total value of loans outstanding, number of borrowers, who
they call members, and number of branches. SKS Microfinance is a non-banking finance
company, or NBFC, registered with and regulated by the Reserve Bank of India (RBI).
They are engaged in providing microfinance services to individuals from poor segments
of rural India. Company's core business is providing small loans exclusively to
poor women predominantly located in rural areas in India. These loans are
provided to such members essentially for use in their small businesses or other
income generating activities and not for personal consumption. These
individuals often have no, or very limited, access to loans from other sources
other than private money lenders that they believe typically charge very high
rates of interest. SKS uses the group lending model where poor women guarantee
each other’s loans. Borrowers
undergo financial literacy training and must pass a test before they are allowed
to take out loans. SKS microfinance is an effective tool that can help reduce
poverty and spread economic opportunity by giving poor people access to
financial services, such as credit and insurance. SKS distributes small loans to
poor women so they can start and expand simple businesses and increase their
incomes. Their micro-enterprises range from raising cows and goats in order to
sell their milk, to opening a village tea stall. Borrowers undergo financial
literacy training and must pass a test before they are allowed to take out
loans weekly meetings with borrowers follow a highly
disciplined approach. Re-payment rates on our collateral-free loans are more
than 99 % because of this systematic process. The company offers
micro-insurance to the poor as well as financing for other goods and services
that can help them combat poverty. It is committed to creating a
distribution network across underserved sections of society in order to provide
easy access to the full portfolio of microfinance products and services. It
also looks at using this network to add value to the lives of its members by
providing quality goods and services that our members need at less than market
rates. India’s
gross domestic savings (GDS) as a percentage of gross domestic products (GDP)
has mostly remained around 35 % in FY15. It is expected that the domestic
savings in India will reach US$ 1,272 billion by 2019 from US$ 683 billion in
2013. The financial services sector consists of the capital markets, insurance
sector and non-banking financial companies (NBFCs) and bits of microfinance
institutions and companies. A major
portion of India’s poor population has no access to banking channels on account
of lack of documentation. As a result, demand for microfinance remains strong.
As per World Bank statistics, 23.6 % of the country’s population earns less
than US$ 1.25 a day, whereas 59.2 % of the population earns less than US$ 2 a
day. Mean household size is 4.8 members per household based on 2005-06 National
Family Health survey, this is translating into 15 Cr household below the
poverty line which are necessarily demand generators for microfinance sector.
Assuming the average credit requirement is Rs. 15,000 to Rs. 20,000 per house-holds,
it translates into overall potential industry size of Rs. 2.25 trillion to Rs. 3.00
trillion. In India, microcredit is provided by two types of institutions - one
is by bank-sponsored Self-help Groups (SHGs) and other is through Microfinance Institutions
(MFIs). The SHG bank-linkage model has reached out to around 9.7 Cr households
through 74 lakh SHGs with gross loan outstanding of Rs. 43,000 Cr. Microcredit
services provided by MFIs in a tailor-made fashion reached out to 3.3 Cr individuals
with an outstanding loan portfolio of Rs. 33,500 Cr. However, the demand-supply
gap remains huge. On the one hand, it requires an enabling and supportive policy
and regulatory environment. On the other hand, the MFI industry has to be responsive,
responsible, sustainable and scalable. MFIs have grown very rapidly at a 59 %
CAGR over FY07-FY15, whereas SHGs managed only a 26 % CAGR. As a result, MFIs’
market share in microcredit went up from 22 % in FY07 to 43 % in FY15. The Operating
environment deteriorated for MFIs post AP government’s ordinance impacting loan
origination and collection efficiency. Some of the large MFI players in AP viz.
Spandana, Share, BSFL and Asmita had to restructure their debt with banks. SKS
was the only large player which was able to service its debt on time without
any need for corporate debt restructuring or CDR. After the AP crisis, the Reserve
Bank of India or RBI set up Malegam Committee to probe the activities and impact
of MFIs across the country and to make recommendations regarding improvement in
their functioning. After the Malegam Committee submitted its report in January
2011, the RBI issued a set of guidelines to cover the operations of non-banking
financial companies or NBFCs functioning as microfinance institutions or MFIs in
March 2012. These guidelines created a new category of NBFCs called NBFCs-MFIs
and specified that all NBFCs undertaking microfinance business, having
capitalisation of Rs. 5 Cr and having over 85 % or more of their exposure in
’qualifying assets’ (microfinance portfolio) should apply for an NBFC-MFI licence
accordingly. Now the GNP as of non-AP MFI portfolio at less than 1% is far
superior to SHGs’ GNPAs of 6.8 %. Now the Branches were brought down by 21 % in FY15 from their peak in
FY11. Similarly, the number of employees was brought down by 31 % during the
same period. Post FY13, branches have increased 19 % and employee count was
increased by 35 %. Considering the fact that the sector’s dynamics have
stabilised post regulations issued by the RBI, consolidation phase is still behind.
SKS
was able to survive the AP crisis as it had started early in diversifying its portfolio
outside the state and raised capital through an initial public offer (IPO) just
months before the AP ordinance, and also qualified institutional placement
(QIP) of shares in July 2012. SKS successfully
managed its debt obligations without taking recourse to the CDR route and
controlled costs through downsizing. It raised equity capital several months
before the IPO. Post issuance, SKS completely wrote off its AP loan book and
had the necessary capital to restart growth. It again raised Rs. 400 Cr in May
2014 to support future growth. Loan growth should also be supported by higher
ticket sizes and so the average outstanding loan in non-AP markets has been
rising consistently over FY11-FY15, yet significantly lower at Rs. 11,434 as against
maximum borrower indebtedness of Rs. 100,000 allowed for NBFC-MFIs. The Average
AUM per borrower for the industry is Rs. 13,160. This limit was recently increased
by the RBI, which indicates the regulator is comfortable with the rise in ticket
size. The disbursement per client is also lower at Rs. 15,869 as against
industry average of Rs. 16,327. It can be expected that growth in ticket size
could be in CAGR of 11 % over FY15-FY18E to Rs. 12,618, as the management is
targeting higher growth in long-term loans having a higher ticket size of Rs. 28,691.
The proportion of long-term loans increased to 16 % in FY15 against 2 % in
FY14. The proportion of long-term loans is likely to increase further with a disbursement
cap of 25 % on overall disbursement. Although there are more than 45
players in the domestic MFI industry, it is dominated by top 5 players with a combined
market share of over 60 % in gross loan portfolio (GLP) and disbursement. Post
imposition of stringent regulations, top 5 players further strengthened their
operations. Two of the top 5 players viz. Bandhan and Equitas, are
concentrating on West Bengal and Tamil Nadu. Two of the other top 5 players
viz, Janalakshmi and Ujjivan are urban MFIs. Thus, SKS is the only MFI with an
efficient geographical diversification which has a
huge network comprising 1,268 branches and 227,125 centres through which it
distributes micro loans. Taking advantage of its network, it distributes those
products which enhance income-generating activity of the members. Such products
and services offering fee income enhance its overall RoA. SKS posted a sharp
decline in AUM after the AP crisis, as it had to write down its loan portfolio
in the state and higher credit losses eroded its net worth and the ability to
lend in other states. While loan growth and collection in AP remains subdued,
the crisis did not spread to other states. With balance sheet clean-up now over
as its AP portfolio is entirely written off and access to funds both equity and
debt are now improving, SKS reported strong AUM growth of 32 % in FY14 and 34 %
in FY15. Its non-AP portfolio reported AUM growth of 40 % in FY14 and 47 % in FY15.
Given the low penetration and strong underlying demand, it can be expected that
in FY15-FY18E, disbursement and AUM CAGR could be at 33% and 40%, respectively.
The company firmly believes that Technology is
one of its biggest differentiator in the industry. It has designed and deployed a web-based Business Intelligence portal
using state-of-art technology and a highly flexible and scalable platform to
support the business growth and operations and has also built an integrated and
encrypted MPLS communication network encompassing a world class Data Centre
delivering mission critical services and enhancing collaboration across the
organization.
Outlook and Valuation:
SKS Microfinance Limited is an India-based
financing company. The Company is engaged primarily in providing microfinance
services to women in the rural areas of India who are enrolled as members and
organized as Joint Liability Groups (JLG). The Company has its operation spread
across 15 states. The Company’s segment includes lending to members. SKS
Microfinance is the largest microfinance company in India in terms of gross loan
portfolio. Its core business is providing small value loans and other basic
financial services to its customers, who are predominantly located in rural areas.
The company extends loans to them mainly for use in small businesses or for
other income generating activities and not for personal consumption. India is
home to 21 % of the world's unbanked adults and about two-thirds of South
Asia's.
Indian microfinance industry is dominated by NBFCs-MFI with an 88 %
share of the market. Though India’s
account penetration increased from 35 % to 53 % between the year 2011 and 2014,
it is still low when compared to other BRICS countries. RBI guidelines in 2011
stipulate that all for profit microfinance institutions in India should operate
as NBFC-MFIs. Not for profit institutions can operate as trusts or Section 25
companies. The microfinance sector in India witnessed rapid growth in the value
of outstanding loans post 2000-01 once RBI granted priority sector status to
bank loans advanced to MFIs. In Union Budget 2016, the government announced
setting up Micro Units Development and Refinance Agency (MUDRA), which will act
as regulator for MFIs and also provide them refinancing services. MUDRA will
have a corpus of Rs 200 billion and serve as a regulator for MFIs and provide
them refinancing services. It will be financing cooperative banks, MFIs,
regional rural banks, etc., at cheaper cost than bank funding. Incorporation of
MUDRA is expected to be a major growth driver for the industry as it will bring
the much needed uniformity in regulations and provide the required funding
support at cheaper cost as currently MFIs are heavily dependent on higher cost
funds from banks. Government of India, the Reserve Bank of India (RBI) and
banking system are striving to further the financial inclusion agenda. The RBI
has identified that the strategy to realise this goal will comprise of a mix of
conducive policy environment, use of innovative channels-technology and optimal
utilisation of the BC model. Financing needs in India have risen with the
notable growth recorded by the economy over the past decade. Along with Banks
and Financial institutions, NBFCs play a major role in meeting the need for
financing needs of entities across the segments. To their credit, NBFCs help
fill the gaps in availability of financial services with respect to products as
well as customer and geographical segments. A strong linkage at the grassroots
level makes them a critical cog in catering to the unbanked masses in rural and
semi-urban reaches, thereby enabling the government and regulators to achieve
the mission of financial inclusion. The RBI guidelines have been instrumental
in restoring confidence in lenders and investors, improving the inflow of both
equity and debt to the sector. MFI’s has strong moat due to stringent regulations by the
Reserve Bank of India (RBI), which has improved transparency and mitigated
political risk. Further,
the setting up of credit bureaus and geographical diversification of its loan
portfolio has kept credit risk under check. JLG model has tremendous strength of its own, with
peer pressure acting as a biggest deterrent for group members to default.
Despite pruning its non-AP loan portfolio, collection efficiency in those
markets was at 97 %, dispelling ever-greening myth. Currently, the spread is
capped at 10 % and operating expenses are very high and, therefore, larger and
established companies have an advantage over new entrants, given their scale of
operations. With the restriction on lending - like not more than two MFIs can
lend to the same borrower - new players will find it difficult if the new
territories are dominated by two or more strong players. Also there’s an entry
barrier to as the spread
is capped at 10 %, it is crucial for microfinance players to contain their operating
expenses in order to enjoy decent RoA. Microfinance is a manpower-intensive
business involving cash disbursement and collection, and frequent interaction
with customers. Given the higher operating expenses involved in loan
origination and collection, larger and established companies have an advantage
over new entrants; given their operating scale and being adequately
capitalised SKS has been able to
raise equity capital in a timely manner. Also not more than two MFIs
can lend to the same borrower, so the
Players intending to enter unrepresented geographies will find it tough to get
ample borrowers if new territories are dominated by two or more strong players.
As a result large players like SKS with a strong presence across states with a
reasonable vintage branch will significantly benefit over smaller players. Even
without utilising the forbearance given by the RBI for its AP loan portfolio,
its capital adequacy ratio has always been higher than the minimum regulatory requirement
of 15 %. RBI has recently increased disbursement
and intentness limit, which indicates the regulator is comfortable with the
rise in ticket size - for disbursement cap in first cycle earlier cap was Rs.
35,000 now it is Rs. 60,000; for Disbursement Cap in Second cycle first the cap
was Rs. 50,000 now it is Rs. 1,00,000; Indebtedness of borrower was Rs. 50,000 earlier
now it is Rs. 1,00,000; Annual Income of rural household cap earlier was Rs.
60,000 now it is Rs. 1,00,000 ; Annual Income of urban household ca earlier was
Rs. 1,20,000 now it is Rs. 1,60,000; Loan for income generating purpose cap earlier
was 70 % now it is 50 %. SKS Micro follows very stringent norms laid by RBI
NBFC-MFI which classifies assets as Standard asset for 0 to 90 days whereas SKS
compliance standard asset it at 0-60 days; for substandard asset - RBI lays 91-180 days whereas SKS has 61-180
days; for Loss Asset- more than 180 days
whereas SKS also has same more than 180 days. For provisioning the norms by RBI
for standard asset is 1 % of overall portfolio reduced by provision for NPA (if
provision for NPA < 1 % of overall portfolio) whereas SKS has 0.25 % to 1.00
% depending on NPA, or as stipulated by RBI whichever is higher; for Substandard
asset RBI has 50 % of instalments overdue whereas SKS has 50 % of outstanding principal;
for loss asset RBI has 100 % of instalments overdue which also SKS follows as
100 % of outstanding principle-write off. So being much capitalised and RBI
compliant, SKS looks forward for small bank licence, after the final guidelines
released by the RBI for small-finance banks, SKS is one of the applicants for
getting a licence for small-finance bank under section 22 of Banking Regulation
Act, 1949. Given the
regulatory requirement that a minimum of 75 % of loans disbursed of a total
small bank’s loan portfolio must be priority sector loans, SKS is the ideal
candidate for a small bank licence as 100 % of its portfolio complies for
priority sector. SKS will benefit in various ways. It can leverage its network
and raise deposits, thereby lowering its funding costs and also enable the
company to diversify its funding structure. It will also help the company in
mitigating political risk by eliminating state government intervention. For SKS
rate
cuts have been supported by a declining cost of borrowing; the marginal cost of
borrowing on balance sheet, including processing fee was 10.9 % as of Q3FY16, a
0.60 % lower than the weighted average cost of borrowing. The drop in lending rates
has enhanced the company’s competitiveness vis-Ã -vis other players. The Fee
income from cross-selling and business correspondence grew 8 % q-o-q and 65 %
y-o-y. So looking forward SKS Microfinance could have AUM growth over 40 %, and
can easily command price to book of 3.5x on book value of Rs. 184 FY18. With successful listing of Equitas
Holding Ltd and with forthcoming of another MFI Ujjivan financial services
would freshen up the interest in already listed and best performing SKS Microfinance
Ltd. Ujjivan financial services Ltd is asking for PE of 19.80 times on FY15
profits, and Ujjivan’s diluted EPS for 9 month FY16 was Rs. 13.37 which takes
its annualized EPS to Rs. 17.80 and at offer price of Rs. 210 this translates
into PE of 11.80 times. But when we look at the exposure Ujjivan has 28 % rural
exposure and 72 % in Urban while SKS Microfinance has 80 % of rural and 20 %
Urban, so better rainfall could benefit SKS more. As for Collection Ujjivan does
this on monthly basis and for SKS Micro does it on weekly basis, the lending
rates is 23 % by Ujjivan and SKS Micro has 20 %. The average ticket size for
Ujjivan is Rs. 19,884 while for SKS Micro its Rs. 15,869. At the current market price of Rs. 616.00, the stock is trading at a PE of 26.55 x FY16E and 17.80 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 23.20 in FY16E and Rs. 34.60 in FY17E. The company plans to change its name from SKS Microfinance Ltd to "Bharat Financial Inclusion Ltd", the company's core business has gone into a transformation and the new name will reflect thie new change complementing the role in fulfilling the national priority of financial inclusion, the new name is subect to regulatory approvals.It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
| KEY FINANCIALS | FY15 | FY16E | FY17E | FY18E |
|---|
| SALES (₹ Crs) | 524.00 | 802.70 | 1,166.10 | 1,525.40 |
| NET PROFIT (₹ Cr) | 187.80 | 295.00 | 439.00 | 564.90 |
| EPS (₹) | 14.90 | 23.20 | 34.60 | 44.50 |
| PE (x) | 38.00 | 24.40 | 16.40 | 12.70 |
| P/BV (x) | 6.80 | 5.40 | 4.00 | 3.10 |
| EV/EBITDA (x) | 16.57 | 11.97 | 10.24 | 9.08 |
| ROE (%) | 24.90 | 24.70 | 28.10 | 27.40 |
| ROCE (%) | 3.90 | 4.30 | 4.60 | 4.20 |
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*As the author of this blog I disclose that I do not hold SKS MICROFINANCE LTD in my any of the portfolios.
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